Calif. Budget Talks Stall Over Education Funding

California  Foiled by a dispute over education funding, Gov. Arnold Schwarzenegger and legislative leaders remain at odds over how to close California's $26.3 billion budget shortfall.

After hours of talks with the Republicans and the governor, Democrats said late Wednesday that talks were stalled over how to repay California schools $11 billion once the economy bounces back. Lawmakers intended to return to closed-door talks Thursday, although they had not set a time.

"When times get better, we want to guarantee that education and kids get paid back the money that they are owed," said state Senate President Pro Tem Darrell Steinberg, D-Sacramento.

Steinberg and state Assembly Speaker Karen Bass, D-Los Angeles, said schools are expected to be among the hardest hit when the deficit is solved, and they want to ensure that they are repaid the money they are owed after the downturn. Democrats want a written guarantee the funds will be repaid but they said Schwarzenegger wanted to offer his word instead.

Aaron McLear, a spokesman for Schwarzenegger, said the governor was prepared to sign legislation guaranteeing the school funding but would not agree to Democrats' demands to revise the state constitution to do so.

"Democrats want to slip in a constitutional change without the vote of the people," McLear said.

Schwarzenegger and one of the Democratic leaders had expressed optimism Wednesday that they could agree quickly on a plan to close the state's massive budget shortfall.

But prospects dimmed as talks concentrated on what to do once California's economic luster returns. Republican legislators said they wanted to concentrate on the current problem rather than future scenarios.

California already has a budget for the fiscal year that began July 1, thanks to an unusual midyear session in February. But the recession has clobbered the state's economy, putting its budget out of balance within weeks.

The shortfall has grown to more than a quarter of the state's general fund, which pays for daily expenses.

As tax revenue has plunged, the state has begun issuing IOUs to state contractors, a practice it may have to expand to government workers if a balanced budget isn't in place by late August. Contributions to the state pension funds also may be in jeopardy.

Lawmakers said they were aware of the frustrations over their inability to strike a deal.

"People say, 'Why does it take so much time?"' Steinberg said. "We understand the question and the concern. Every number represents a family. Every number represents a child or an elderly person. And you know we're going to get this done, but it is worth fighting for those people."

Schwarzenegger and the Republican leaders of the Assembly and Senate say they will not increase taxes, a point the governor has been making in a commercial that began airing this week.

That means he and lawmakers must close the gap with spending cuts and other measures, which could include accelerating income tax collections, borrowing tax money from city and county governments, and shifting money between existing government accounts.

The outstanding issues include funding for education and health and human services, the size of any reserve fund and whether California should raid local government accounts.

The state's credit rating continues to sink as lawmakers try to find common ground.

On Tuesday, Moody's Investor Services downgraded California bonds to near-junk status, from A2 to Baa1, and placed the state's credit rating on watch for possible further reductions. The credit rating agency said the budget deadlock had put constitutionally required payments to bond holders at risk.

The administration also notified state employee unions that the state would cut 2,000 jobs on top of 4,600 layoff notices issued previously.

Schwarzenegger said he wants to avoid a budget-balancing plan that addresses only the state's current fiscal problems. He instead wants to begin streamlining government and weeding out waste and abuse.

Democrats have agreed to allow the governor to study whether California should privatize its welfare eligibility system, as other states have done. Currently, counties determine who is eligible for welfare.